Tenancy by the Entirety

April 13, 2006

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Where state law permits it, owning your home in the form of tenancy by the entirety may offer you the greatest protection, when no homestead exemption is available for asset exemption planning.

Tenancy by the entirety is not available to all homeowners. It is available only to married couples who take title to their home in this ownership form. As discussed later, it also is not available in all states.

The theory behind tenancy by the entirety is that the married couple is one single unit. Thus, neither spouse may voluntarily, or involuntarily, convey their interest in the home without the consent of the other. This rule places the home out of the reach of the creditors of one of the spouses. Tenancy by the entirety applies only to your personal residence; you can't use it for other real estate or for other types of assets.

It's important to know that the protection afforded by this form of ownership only applies when a creditor attempts to collect on a debt that is in the name of just one of the spouses. Where both spouses are jointly liable on a debt, this form of ownership offers no protection.

Since tenancy by the entirety is a creature of state law, in order to take advantage of it in a bankruptcy action, you would have to use your state's exemptions as opposed to the federal exemptions. Even then, the exemption will be valuable only if both spouses do not file for bankruptcy together, and only if the filing spouse is solely liable for the debt resulting in the lien on the home.

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The following states permit a husband and wife to own a home in the form of a tenancy by the entirety:

States Permitting Tenancy by the Entirety
Delaware	Maryland	Pennsylvania
District of Columbia	Massachusetts	Rhode Island
Florida	Michigan	Tennessee
Hawaii	New Jersey	Vermont
Illinois	North Carolina	Virginia
Indiana	Ohio	Wyoming

Because many of these states offer either no homestead exemption, or a relatively low exemption, the small business owner may want to consider using this ownership form to protect a home. However, this form of ownership may not be available in all of the states that offer only a limited homestead exemption, so check your state's laws to make sure.

Tenancy by the entirety can offer significant protection, especially in the case of the small business owner. In practice, usually one spouse will own or operate the business. This spouse may incur debts from personal guarantees extended on the business's debts, or the personal commission of torts such as negligence while carrying out the business's activities. Because the other spouse will not be a party to these debts, the home will be protected from liability for the debts if it is owned in tenancy by the entirety.

Where both a husband and wife are actively involved in operating a business, caution must be exercised. This ownership form offers no protection for debts on which the couple is jointly liable.

Thus, great efforts should be made to ensure that only one spouse guarantees the contracts of the business entity, if the business's creditor demands a personal guarantee.

Note that other strategies can protect assets when spouses operate a business together. For example, if either spouse commits an act of negligence, the other would not be liable, provided they are operating the business in the form of an LLC or corporation.

Warning

In contrast, both spouses would be liable for an individual spouse's negligence if the business is a general partnership and both spouses are owners. Only tenancy by the entirety could protect the couple's home if no homestead exemption is available. Remember, the general partnership is a business form that should be avoided, precisely because of the tremendous exposure to liability that it involves.

Finally, using this ownership form usually requires that the married couple take their interest in the home through the same deed at the same time. Thus, a transfer by a husband of a half-interest in a home to his new spouse cannot create a tenancy by the entirety. To correctly convert property to this form, the sole owner should transfer, by deed, the entire interest in the property to himself and his spouse, so that they both take their interests at the same time and through the same deed. Have an attorney draft or review the deed to make sure it accomplishes your purposes.

Don't confuse tenancy by the entirety with joint tenancy, tenancy in common, or community property. These forms of ownership do not offer the kind of protection as does tenancy by the entirety.

Warning

If your homestead is already jointly owned with your spouse, converting it to tenancy by the entirety carries no additional risks. However, when the small business owner holds the home as separate property and conveys an interest in the residence to the other spouse solely to take advantage of tenancy by the entirety, an additional risk is created--namely, loss of the home (or a half-interest in it) if a divorce should occur.

The homeowner in this situation should weigh the risk of loss of the home to his or her individual creditors against the risk of loss that may occur as a result of a divorce.

Moreover, if a bankruptcy action is filed by one spouse, the property will become part of the bankruptcy estate if the nonfiling spouse dies, or receives a final decree of divorce, within six months after the bankruptcy action is completed.

If a divorce is a real possibility in the future, it may be possible to delay the divorce long enough to avoid this provision.

In addition, another protective strategy--transferring assets to the non-business-owner spouse--faces the same risks from divorce.